As long predicted by your humble blogger, Labor’s economic chickens are coming home to roost.
It looks like the first chicken entering the coop as our long economic night begins to fall, is the sovereign AAA credit rating.
All the other inbred, debt-fed chickens mentioned here over the past two years, will be following close behind.
Houses and Holes at MacroBusiness has the story (my emphasis added, in quoted story):
From S&P and Fitch via the AFR this morning comes the hard, cold truth about the trap in which the Australian economy is caught:
Federal Treasurer Wayne Swan has been put on notice by ratings agencies to deliver a tough budget next month to protect Australia’s coveted AAA credit standing.
Australia is one of only 14 countries in the world with a top ranking from each of the three major agencies but analysts at Standard & Poor’s and Fitch Ratings are concerned about the banking system’s reliance on overseas funding.
“The AAA rating is pinned on the strength of the government’s fiscal position and if it doesn’t have that, we have less cause to see it as a AAA-rated sovereign, given how weak the banking system is in terms of its external liquidity,” said S&P credit analyst Kyran Curry.
“To be consistent with maintaining a AAA rating . . the government would really need to stabilise its fiscal position as soon as possible.”
Mr Curry said the external liquidity of Australia’s banking system was“quite weak” and the industry was overleveraged.
Exactly what your humble blogger has been arguing, ever since launching this blog over 2 years ago. Our real economic weakness, is the fundamentally immoral, fraudulent, parasitical, house-of-cards banking system, whose continued existence and blood-sucking profits has been guaranteed by the government (meaning, by you, the taxpayer). Just like it has in the rest of the now-slowly-collapsing Western world.
“If there is stress in the banking system like in Europe, [its] liabilities could migrate on to the government’s balance sheet,” he said.
Fitch Hong Kong-based director Art Woo said banking sector liabilities were always a “potential concern”.
…“The reality is that, if they don’t bring the budget back into surplus, we have to judge why,” Mr Woo said. “Is it because they haven’t put the right measures in place or because you get a cyclical downturn and the revenues don’t come through?”
…“This budget is very important to us,” Mr Curry said. “We will be looking more broadly for the government to demonstrate that it can remain committed to stabilising its debt dynamics over the medium term. This government needs to have a strong balance sheet to offset some of the weaknesses that we see for the sovereign,” he said.
“The main issue is the importance of maintaining a strong balance sheet and running surpluses over the cycle to give the government the sort of flexibility it had pre-2009 to respond should the external environment weaken and present a problem for the banking system, which is highly leveraged.”
…“It’s important that the government stabilises its fiscal position as soon as conditions allow,” Mr Curry said. “We are not necessarily looking for a return of the balance to surplus this year but we would be looking for a continued path to stabilise its fiscal position.”
Through galactic incompetence, pathological self-interest, rampant self-deception, and mindless obeisance to the “bozos” (h/t Alan Kohler) in the Treasury department, the Labor government has now firmly wedged itself.
And the nation.
If Labor does actually (ie, not just on paper, in the budget ‘forecast’) cut government spending by the enormous amount necessary to achieve a budget outcome (not ‘forecast’) that would keep the ratings agencies happy, Australia is absolutely assured of a recession. Why? Because the private sector economy is too weak already to cope with a huge cut in government spending. Meaning … unemployment up => government revenues (income tax) down => government expenses (unemployment benefits) up => government budget deficit worse => credit rating cut more, PLUS mortgage arrears up => defaults up => bank “asset” values down => bank wholesale funding costs up => mortgage interest rates up => more arrears & defaults => bank/s collapse => government bailout/s => sovereign credit rating cut more => economic death spiral, a la Ireland.
If Labor does not actually cut government spending by the enormous amount necessary to achieve a budget outcome (not ‘forecast’) that would keep the ratings agencies happy, Australia is also absolutely assured of a recession. Why? Because as seen above, the ratings agencies will slash the sovereign credit rating. Meaning … bank wholesale funding costs up => mortgage interest rates up => mortgage arrears up => defaults up => bank “asset” values down => bank wholesale funding costs up => mortgage interest rates up => more arrears & defaults => bank/s collapse => government bailout/s => sovereign credit rating cut more => economic death spiral, a la Ireland.
It is all over bar the loud squawking and fighting for an elevated perch and shitting ourselves everywhere, folks.
We are stuffed.
Now, more than ever, it is just a matter of time.
Barnaby was right:
“If you do not manage debt, debt manages you” – Feb 2010
What a terrible shame for each and every one of us, that all the “experts” in politics, Treasury, the RBA, the Canberra Press Gallery, and the leftarded twittering armchair commentariat, poured torrents of rabid scorn and ridicule on the unpolished, plain speaking, “little old bush accountant” from St George way back in late 2009 and early 2010.
If only we had all listened to Barnaby then – when the total Gross Debt was $117 billion, versus $237.5 billion today – then perhaps, just perhaps, we would have had a slim chance of getting out of the enormous hole that Kevin and Julia and Wayne and Lindsay and the Treasury department #JAFA’s have collectively dug for us.